Bleak predictions for rand, with R20 perhaps on the cards

THE MOST accurate rand forecaster became one of the most bearish on South Africa’s currency for 2016 after President Jacob Zuma fired two finance ministers in four days.

The rand, which depreciated 25 percent against the dollar last year and extended losses to a record on Monday last week, may drop another 2 percent to R17.10 per dollar by year-end, Landesbank Baden-Wuerttemberg (LBBW) predicts.

That is 7 percent weaker than the median forecast of analysts in a Bloomberg survey, and almost 16 percent lower than the lender’s previous prediction, made before Zuma roiled markets last month by removing Nhlanhla Nene as the finance minister and replacing him with a little-known MP, raising questions about his commitment to fiscal targets.

“That was an event that made us change our forecast, absolutely,” Martin Gueth, a currency strategist at LBBW, said last week. “We already had a pessimistic view before that due to the structural weaknesses of South Africa and the decline in commodity prices. This was a really strong negative signal to us of how the political leadership is conducting its policy.”

The Stuttgart-based lender was the best forecaster of the dollar-rand exchange rate in 2015 on a four-quarter rolling basis, according to Bloomberg’s rankings. Before Zuma fired Nene and replaced him with David van Rooyen, sparking a record rand slump and sending bond yields to the highest since the 2008 financial crisis, LBBW predicted the currency would be at R14.80 per dollar by the end of this year.

Zuma reconsidered four days later and reappointed Pravin Gordhan, who had served as finance minister from 2009 to 2014. Gordhan has pledged to stick to expenditure targets and do whatever is necessary to avoid a credit downgrade to junk. Still, the damage was done, Gueth said.

“We definitely see the risk that South Africa might lose its investment grade rating and if that happens we expect further weakness of the rand. If that were to happen, I expect it would further change our currency forecast.”

South Africa’s economy is under strain from the slump in commodity prices and a slowdown in China, its biggest trading partner, at a time when rising interest rates in the US are drawing capital away from emerging markets. The International Monetary Fund on Tuesday cut its growth forecast for South Africa by almost half to 0.7 percent this year after the economy narrowly avoided falling into a recession in 2015.

The Reserve Bank, which raised the benchmark policy rate twice last year by 25 basis points at a time, now has to contend with the worst drought in more than 100 years driving food prices higher while the weak rand pushes up the cost of imports. Deputy governor Daniel Mminele said last week that the central bank would be prepared “to take decisive action” if price stability came under threat.

Borrowing costs will rise by 50 basis points at the January 28 policy meeting, according to the median estimate of 11 economists surveyed by Bloomberg. While that may support the rand, it could further damage the economy.

“Given the currency has fallen so much and so fast, it’s probably better to be a little bit more aggressive,” Nigel Rendell, a senior emerging markets analyst at Medley Global Advisors, said on Monday.

By 8.20pm yesterday, the rand was weaker at R16.9086 per dollar. It could fall to R20 per dollar should South Africa’s credit rating be cut to junk under Zuma’s leadership, according to Abri du Plessis, a portfolio manager at Gryphon Asset Management.

The currency’s decline could push the central bank into raising the repurchase rate by as much as 100 basis points, according to Nomura International, which predicts the rand will reach R19 per dollar by year-end, the most bearish in the Bloomberg survey.

“We are in uncharted territory here,” Peter Attard Montalto, the London-based senior emerging markets strategist at Nomura, said at the beginning of this month. A rate of R19 per dollar “seems achievable in a country facing a downgrade and widening current account deficit and capital flight, and with China and Fed hikes looming”. – Bloomberg